In September 2023, the Consumer Financial Protection Bureau (“CFPB”) released Data Point: 2022 Mortgage Market Activity and Trends (“Data Point”).[1] In the Data Point, the CFPB analyzed applications and originations reportable under the Home Mortgage Disclosure Act (“HMDA”) and summarized 2022 mortgage market activity, highlighting declines in mortgage activity and shifts in transaction types. Significant takeaways include:

• A substantial decline from 2021 in both application (38.6 percent decline) and origination (44.1 percent decline) volumes;
• An even greater decline (50.9 percent) in originations of closed-end mortgage loans secured by site-built single-family homes, driven by a decline of 73.2 percent in refinance originations for such properties;
• A 33.3 percent increase in home equity line of credit (“HELOC”) originations; and
• More borrowers paid discount points in 2022 than in any year since 2018, when this data point was added to HMDA.

The CFPB also identified declining mortgage affordability:

• Median total loan costs for home purchase transactions increased 21.8 percent over 2021;
• Median total loan costs for refinance transactions increased by 49.3 percent over the prior year;
• For conventional conforming 30-year fixed-rate mortgages, the average monthly payment excluding taxes and insurance increased by 46.1 percent, driven primarily by increases in mortgage interest rates; and
• Debt-to-income ratios (DTI) rose overall and as a denial reason for all groups, with the increase in DTI among African American and Hispanic White borrowers particularly notable.

This analysis leads to the first lesson from the Data Point. Mortgages are more expensive. In addition, homes are less affordable, with the “Shelter” component of the Consumer Price Index increasing for 40 consecutive months. CoreLogic notes that home prices increased 2.5 percent nationally in the 12 months ending July 2023, and increases have exceeded 7 percent in some states.[2]  Prices are expected to continue to increase through 2024.[3]  Given declining affordability, lenders should carefully evaluate ability to repay when underwriting HMDA-reportable credit.

Second, to serve all aspects of the housing finance market, lenders should evaluate their product offerings for adequacy of products suitable for low- and moderate-income households. Declining affordability may increase consumer interest in mortgage products with lower downpayment or closing cost requirements. Programs to help meet these needs may include low downpayment products, lender-funded downpayment or closing cost assistance programs, or grant programs, forgivable or  deferrable second mortgages, and similar programs.

Borrowers seeking more affordable housing options may be interested in financing manufactured housing. Applications for loans secured by manufactured single-family homes as a percentage of applications for all loans secured by single-family homes rose from 3 percent in 2021 to 5 percent in 2022.[4] Similarly, buyers priced out of the home purchase market may be interested in financing improvements to their existing homes. Lenders may need to evaluate their abilities to finance these activities.

When announcing the release of the Data Point, CFPB Director Rohit Chopra said, “We also found some noteworthy disparities in outcomes, with Black and Hispanic borrowers faring worse when it comes to approvals, loan sizes, and fees.”[5] The Data Point found that, compared to Asian and White borrowers, Black and Hispanic borrowers were more likely to be denied loans, to receive smaller loans when approved, and to pay both higher upfront fees and interest rates.[6]

Third, the Data Point makes it clear that monitoring and testing of disparities in mortgage application outcomes remains a critical component of robust fair lending risk management. Accordingly, lenders should evaluate their fair lending work programs to ensure adequate testing of underwriting and pricing outcomes. When testing disparities in pricing, lenders should consider evaluating upfront loan costs as well as interest rates.

In his statement on the release of the Data Point, Director Chopra observed:

Importantly, the data revealed that cash-out refinances comprise the majority of all refinancing activity. These loans allow a borrower to draw on their home equity. It is possible that homeowners are finding it difficult to move and are using the proceeds from cash-out refinances for renovations and repairs. However, some may be using these products to pay for higher education or other expenses unrelated to housing. Relatedly, we found an increase in home equity lines of credit. . . the CFPB will be devoting more attention to ensure that borrowers can sufficiently navigate alternatives to foreclosure when faced with financial distress. For example, we are currently exploring some amendments to mortgage servicing standards.

This statement underscores the fourth lesson contained in the Data Point. If borrowers are using cash-out refinances or HELOCs to pay for expenses unrelated to housing, it may be an indicator of increasing financial stress. Servicers should prepare to respond to consumer financial distress and monitor for rulemaking related to mortgage servicing standards.

To summarize, increasing mortgage and housing costs are causing changes in the mortgage lending market. The resulting financial stress may lead to increased demand for loss mitigation and foreclosure prevention in servicing. In addition, the focus on fair lending continues. Lenders should evaluate their product offerings and fair lending compliance management systems in light of these market forces. Servicers should ensure they are prepared if default servicing volumes begin to rise and that their practices result in fair servicing outcomes.

Lynn Woosley is a Managing Director with Asurity Advisory. She has more than 30 years’ risk management experience in both financial services and regulatory environments. She is an expert in consumer protection, including fair lending, community reinvestment, and UDAAP.

Before joining Asurity Advisory, Lynn led the fair banking practice for an advisory firm. She has also held multiple leadership positions, including Senior Vice President and Fair and Responsible Banking Officer, within the Enterprise Risk Management division of a top 10 bank.

Prior to joining the private sector, Lynn served as Senior Examiner and Fair Lending Advisory Economist at the Federal Reserve Bank of Atlanta.

[1] Available at https://files.consumerfinance.gov/f/documents/cfpb_data-point-mortgage-market-activity-trends_report_2023-09.pdf

[2] https://www.corelogic.com/intelligence/us-home-price-insights-september-2023/

[3] https://www.corelogic.com/intelligence/us-home-price-insights-september-2023/

[4] RiskExec analysis of data from https://ffiec.cfpb.gov/data-browser/data/2022?category=nationwide and https://ffiec.cfpb.gov/data-browser/data/2021?category=nationwide

[5] https://www.consumerfinance.gov/about-us/newsroom/statement-of-cfpb-director-rohit-chopra-on-mortgage-market-activity-and-trends/

[6] https://www.consumerfinance.gov/about-us/newsroom/cfpb-mortgage-report-finds-jumps-in-closing-costs-and-denials-for-insufficient-income-growing-proportion-of-cash-out-refinances/